Switch pricing and DAC6 – greater than the devoted logos

The Council Directive 2018/822 / EU of May 25, 2018, commonly referred to as "DAC6", has fundamentally changed Directive 2011/16 / EU of February 15, 2011 on administrative cooperation in the tax area to include a mandatory reporting system for potentially aggressive cross-border agreements.

The guideline is inspired by Action 12 (Mandatory Disclosure Rules) of the Organization for Economic Cooperation and Development (OECD) project / the G-20 project “Base Erosion and Profit Shifting” (BEPS). It complements the reporting obligations introduced in recent years with the special feature that it is primarily aimed at "intermediaries" who are involved in the implementation of such agreements.

DAC6 purpose and characteristics

One of the main purposes of the DAC6 is to enable EU Member States to respond promptly to harmful tax practices, in particular by increasing the effectiveness of tax audits in international affairs, including those related to transfer pricing, which have recently become increasingly important have moved into focus.

DAC6 provides for a two-stage reporting mechanism, firstly the reporting of the intermediary and, secondly, the automatic exchange of the information reported by the intermediary between the Member States concerned.

To determine whether an agreement should be reported as defined in DAC6, a five-step process applies:

  • Are there any rules?
  • Does this rule include any of the taxes that are covered?
  • Can this agreement be described as "cross-border"?
  • Does this regulation contain one of the "characteristics" of tax avoidance?
  • Has the main tax credit test been passed, if any?


DAC6 marks correspond to a feature or feature of an agreement that indicates a potential risk of tax avoidance. DAC6 provides five categories of hallmarks (categories A to E), which are divided into two types of hallmarks:

  • independent identification, d. H. the mere presence of which entails a reporting obligation; and
  • Identifiers that require the main tax benefit to be assessed, d. H. Indicators that must demonstrate that the main benefit or one of the main benefits that can reasonably be expected from the arrangement is the achievement of a tax advantage (see table below).

With regard to transfer pricing, category E provides three special features; Agreements containing any of these indicators must be disclosed even if they do not pass the main tax benefit test. As described below, however, transfer pricing arrangements are not addressed by these three specific indicators alone. Other A, B, and C labels may also apply to transfer pricing transactions as they relate to transfer pricing either indirectly or incidentally.

Transfer pricing indicator – Category E

Category E flags relate to the application of unilateral safe harbor rules (E1), the transfer of difficult-to-value intangible assets (E2), and intra-group cross-border transfers of functions and / or risks and / or assets that result in a significant decline the earnings before interest and taxes (EBIT) (E3).

Scope of "Transfer Pricing" Transactions Covered

Category E labels are dedicated to transfer pricing. For the purposes of DAC6, an “Affiliate” is defined for DAC6 purposes as “a person who:

  • participates in the management of another person in that he or she can exercise significant influence over the other person;
  • participates in the control of another person through an interest that exceeds 25% of the voting rights;
  • holds an interest in another person's capital by a property right that directly or indirectly exceeds 25% of the capital;
  • is entitled to 25% or more of someone else's profits. "

Particular attention should be paid to possible differences between the definition of an “affiliate” as used in DAC6 and its definition under national law. If these definitions differ, it may be necessary to review additional transactions under DAC6 versus those documented for transfer pricing purposes under national law.

For example, in France, the term “affiliated companies” for the purposes of transfer pricing legislation generally refers to a 50% stake. Since DAC6 covers ownership of 25%, the scope of the DAC6 regulations is much broader than the French transfer pricing legislation.

In any case, the fact that transactions are documented for transfer pricing purposes or comply with the arm's length principle is not sufficient to be excluded from the DAC6 report as long as the intended transaction is one of the DAC6 codes (either a transfer pricing code or another).

Hallmark E1

This indicator applies to all agreements that contain the application of unilateral Safe Harbor rules.

"Safe Harbor Rules" are not defined by DAC6; but a safe harbor rule is defined in the 2017 OECD Transfer Pricing Guidelines (paragraph 4.102) as “a provision that applies to a defined category of taxpayers or transactions that exempts eligible taxpayers from certain obligations otherwise imposed by general transfer pricing rules imposed on a country. (…). "

Safe Harbor rules are to be distinguished from simplification measures that do not directly include the determination of arm's length prices (e.g. simplified documentation requirements). On this basis, certain tax administrations, including the French tax administration, have expressly excluded pre-pricing agreements from the scope of the E1 label and the undercapitalization rules.

An example of a unilateral safe harbor rule (which results in a reportable agreement) is given in the French tax administration guidelines, see below.

A French company (F) benefits from a loan from an affiliated company (A) based in E. In return, F pays interest to A. To calculate his taxable profit in E, A applies a circular from the tax authorities of the state that applies to group finance companies. This circular stipulates that companies that act as finance intermediaries within a group can automatically be considered recipients on market terms if their profit corresponds to 2% of the financed assets, without this being necessary in relation to the loans granted or received by the mentioned companies to examine the terms that would have been agreed by independent parties in comparable circumstances.

The Unilateral Safe Harbor Rule is the rule according to which a financial company of a group automatically receives compensation on an arm's length basis if its profit equals 2% of the financed assets, regardless of loans made in similar circumstances between independent companies.

Bilateral or multilateral safe harbor rules should be excluded from the scope of the E1 label. Therefore, the application of a fixed surcharge of 5% to intra-group services with low added value, which is not justified by a benchmark study according to Section 7.61 of the 2017 OECD Transfer Pricing Guidelines, should be considered outside the scope of the unilateral Safe Harbor provisions .

Hallmark E2

This indicator applies to all agreements for the transfer of difficult-to-value intangible assets (HTVIs) between affiliated companies.

According to paragraph 6.189 of the 2017 OECD Transfer Pricing Guidelines, HTVIs are intangible assets or rights to intangible assets that, at the time of their transfer, meet two conditions: (i) there are no reliable comparables; and (ii) at the time the transaction is closed, the projections of the future cash flows or income expected from the transferred intangible asset or the assumptions used in the valuation of the intangible asset are very uncertain, making it difficult to predict the amount of ultimate success of intangible assets at the time of transfer.

Based on the above, HTVIs can have the following characteristics:

  • they may only be partially developed at the time of transfer;
  • they are not expected to be commercially exploited for several years or are exploited in a novel way;
  • they are transferred for a one-time payment; or
  • they are used or developed in the context of a cost-sharing agreement or similar arrangement.

To the extent that the valuation of an intangible asset is inherently uncertain, this determination could apply to a wide variety of transactions.

In France, the French tax administration guidelines clarified that the transfer of patents and other intangible assets related to a pharmaceutical formula at an early stage of development could be subject to DAC6 rules if: (i) there is no reliable comparison; and (ii) at this stage in the partial development of the pharmaceutical formula, the formula is not expected to be commercially exploited for several years.

The nature of the transferred intangible asset and whether it qualifies as an HTVI should be taken into account when the reporting requirement arises.

Hallmark E3

This indicator relates to the intra-group cross-border transfer of functions and / or risks and / or assets, which leads to a significant decrease in EBIT. It applies to any agreement that involves an intra-group cross-border transfer of functions and / or risks and / or assets if the projected annual EBIT of the transferor (s) during the three-year period following the transfer is less than 50% of. is the forecast annual EBIT of the transferor or the transferor if the transfer had not taken place.

Intra-group cross-border transfer of functions and / or risks and / or assets

Even if DAC6 does not define a “group”, the summary of the services of the European Commission of September 24, 2018 clarified that any “intra-group” relationship refers to a relationship between “affiliated companies”.

All types of cross-border corporate restructuring should be covered as they may affect the division of functions, risks and assets between the affiliates of a group and thus lead to a material change in the EBIT of the (or the transferring) transferor.

In this context, Chapter IX of the 2017 OECD Transfer Pricing Guidelines, more precisely paragraph 9.1, defines corporate restructuring as "the cross-border reorganization of trade or financial relationships between affiliated companies, including the termination or significant renegotiation of existing agreements". . "

In practice, restructurings fall, which are likely to fall under this indicator, as they can lead to a decrease in profitability, in particular the conversion of full-fledged traders into traders with limited risk, the conversion of full-fledged manufacturers into contract or contract manufacturers, the transfer of intangible ones Assets to a centralized company or the rationalization of production processes or research and development activities.

It should be noted that this indicator also applies if the acquirer is resident in a "high-tax country".

Forecasts of future income

This indicator requires a comparison of the projected future earnings after the transfer with the projected EBIT if the transfer had not been made.

The French tax administration guidelines provide an example of the transformation of a French sole distributor (buyer-reseller) (subsidiary of a foreign group) into a commercial agent whose activities are limited to product promotion and market research. Before the conversion, the French company was remunerated with a gross margin (resale price method minus 20%). After the conversion, she will be remunerated with a commission that is calculated in such a way that she receives a margin of 2% at her expense. The transfer of functions, risks and assets to the parent company has led to a reduction in sales from 100 million euros to 6 million euros per year and the operating result from 2 million euros to 0.7 million euros per year.

The French company's earnings before interest and taxes are more than 50% lower than without such a transfer: the agreement is therefore within the scope of DAC6 reporting.

Indicators that relate indirectly to standard transfer pricing agreements

The E flag may not be the only flag that applies to standard transfer pricing agreements. Such arrangements may “fall” into other categories of labels, although the direct purpose of such labels may not be to address transfer pricing arrangements. These indicators are indicators A3 for agreements based on standardized documentation / structure and indicators C1 for deductible cross-border payments between affiliated companies.

Hallmark A3

The A3 quality seal applies to any agreement that has essentially standardized documentation and / or structure and is available to more than one relevant taxpayer without the implementation having to be significantly adapted.

The term “standardized documentation and / or structure” is inspired by the concept of “mass marketed systems” used by the OECD to define “standardized tax product” in Action 12 of the OECD / G-20 BEPS project. It is also close to the concept of "marketable design" addressed by DAC6; H. a cross-border design that is conceived, marketed, ready for implementation or made available for implementation without substantial adaptation.

The main features of such agreements are their ease of replication and / or implementation that do not require significant additional professional advice or services.

A characteristic of this indicator is that it is only reportable if the main test of the tax advantage is fulfilled.

In this regard, many countries, including France, have excluded standardized tax products, the tax result of which is compatible with the purpose of the legislation, such as standard banking contracts, licenses or company formation, from the scope of the trademark. The French tax authorities have stipulated in their guidelines that certain banking and financial products are exempt from reporting, provided that the tax advantage received is provided for under French law and the use of these products complies with the purpose of the legislation.

However, transfer pricing agreements are not covered by these French tax administration guidelines, which could lead to certain standardized intra-group agreements (e.g. Be.

Hallmark C1

This indicator applies to all agreements that contain deductible cross-border payments between two or more affiliated companies. Since transfer pricing agreements are inextricably linked to cross-border agreements between affiliated companies, a transfer pricing agreement can fall under the C1 indicator. This indicator should therefore be questioned in the event of a transfer pricing agreement.

In addition, the different sub-categories of the C1 label may not apply in a uniform manner, as some sub-categories apply the main tax credit test and others do not, as shown in the table above.

The indicator C1a applies if the payee is not resident for tax purposes in any jurisdiction.

This situation is likely to arise in cases where none of the jurisdictions concerned consider that the income is attributable to one of their residents. Residence is assessed according to the definitions of the applicable double taxation treaty.

The C1b indicator applies if the jurisdiction in which the beneficiary resides:

  • does not levy corporate income tax (CIT) or levy a CIT at zero or near zero rate; or
  • is on a list of non-cooperative legal systems.

The zero rate CIT varies from country to country, despite a European Commission recommendation of 1%. In France, a CIT rate of almost zero corresponds to a CIT rate of less than 2%.

With regard to non-cooperative legal systems, DAC6 refers to a list of third countries that have been assessed as non-cooperative by the member states collectively or within the framework of the OECD. In France, the lists of non-cooperative legal systems to which the guidelines of the French tax administration refer are the EU list and the OECD list (for legal systems identified by the OECD in the context of the Global Forum on Tax Transparency as non-compliant or partial rated conform).

The C1c indicator applies to payments that are fully exempt at the recipient's place of residence.

The question arose whether the exemption is related to the status of the income recipient (e.g. pension fund) or to the type of income. Different positions have been taken by different jurisdictions. In France, for example, the exemption includes payments that would not be taxed due to an allowance, compensation, deduction of losses or other deductible expenses, deduction / credit of taxes paid abroad, or notional tax credit. In the guidelines of the French tax administration it was made clear that the tax exemption in question may have been granted in connection with a cross-border preliminary ruling within the meaning of Directive 2015/2376 of December 8, 2015 ("DAC3"), which may concern transfer pricing issues.

The C1d indicator applies when the payment benefits from a preferential tax system.

The term “preferential tax system” is not defined by DAC6. The exact scope of this provision therefore depends on the position of the individual legal systems concerned.

While some jurisdictions have chosen to limit the scope to harmful preferential regimes, the French approach is much broader as it relates to Action 5 of the OECD / G20 BEPS project preferential regimes, with no restriction to “harmful” regimes. This position is surprising when you consider that French tax law already provides for a definition of a “preferential tax system” and that the guidelines of the French tax administration have expressly stated that this definition should not be retained in the DAC6.

The “preference” is assessed on the basis of the general taxation principle of the country concerned. The type of preference can vary. It covers reductions in tax rates or tax bases, discounted payment terms or tax refunds. A preferential regulation can also apply due to a cross-border regulation within the meaning of DAC3, which can affect transfer pricing issues.

Identifiers that, by the way, deal with transfer pricing

Incidentally, labels that relate to transfer pricing could be defined as labels that are not particularly or directly relevant to the treatment of transfer pricing aspects of an agreement, but that should be considered when working on transfer pricing.

Transfer pricing issues may arise, for example, in connection with asset valuation transactions or loss-making companies. In this context, the B hallmarks, which include specific hallmarks related to the main utility test, and the remaining categories of the C hallmark (C2, C3 and C4), which include specific hallmarks related to cross-border transactions, should be kept in mind a DAC6- Perspective in dealing with transfer pricing.


Since transfer pricing is the subject of a special label, DAC6 confirms – following the work of the OECD / G-20 within the framework of the BEPS project – that transfer pricing is seen by governments as a potential tool for tax avoidance. As stated above, when analyzing a particular transaction, transfer pricing practitioners should consider not only the transfer pricing specific characteristics (which belong to Category E), but almost all other categories of characteristics as well, in order to consider whether such a transaction should be disclosed under DAC6 .

DAC6 and transfer pricing provisions are two complementary sets of rules. The various reporting obligations for transfer prices therefore do not conflict with a DAC6 report. In addition, transactions that are documented in accordance with the transfer pricing regulations as being arm's length regulations may still have to be reported according to the DAC6 regulations. Thus, even routine transactions do not prevent the need to check whether the transactions fall within the scope of DAC6.

This column does not necessarily represent the opinion of the Bureau of National Affairs, Inc. or its owners.

Xavier Daluzeau is a partner, Celine Pasquier is a senior associate and Delphine Groux is a tax professional at CMS Francis Lefebvre Avocats.

The authors can be contacted at: [email protected]; [email protected]; [email protected]